After believing that diplomatic negotiations were bearing fruit and that troops were withdrawing, at the beginning of the week we saw Russia launch a full-scale offensive on Ukrainian territory which, at the time of writing, was on the verge of losing control of its capital, Kiev. To be honest, I have little idea how far this could escalate, the real reasons for the conflict (the real ones, not the stated ones), and what the eventual outcome might be. I'll leave that to people who know more, especially those who have a historical understanding of conflicts with a different perspective than we have in the West. But that doesn't mean that, based on what we know so far, we can't make some changes in the macroeconomic sphere for the short and medium term with respect to the baseline scenario for 2022.

Firstly, it is essential to consider this episode as a supply shock. This is vital when projecting possible stabilization measures by, for example, central banks. Second, far from helping to solve any of the main problems arising from the pandemic, this situation would only make them worse: supply chains, pressure on food prices, rising energy prices, etc. Third, increased volatility has impacted and will continue to impact markets, which could be more complex for already complicated emerging markets.

Without wishing to minimize the drama that any war causes for people (which is this economist's number one concern), I believe that this invasion makes the decisions that monetary policy makers will have to take over the coming months even more difficult. On the one hand, they will now have more reasons to raise rates, in a clearly more inflationary context, but on the other hand, the effects on economic activity (more evident in Europe, less so in the US) could delay the long-awaited normalization. Unfortunately, the extent of the conflict, the sanctions imposed, and the ability to replace some of Russia's exports will be vital in determining how long this pause in the rate adjustment process should be.

At the local level, the greatest risk is related to the continued persistence of oil prices above US$100 (or even higher), but also to food prices that could continue to rise. Some of this could be offset by increases in the price of copper and other commodities that we export, but the balance is leaning toward the negative. However, returning to what I mentioned at the beginning of the second paragraph, there is little the Central Bank can do in the face of a pure supply shock. If we consider additional MPR increases to those we have already projected, I believe they should only be considered in the case of more persistent unanchoring of inflation expectations and not in CPI data that could be higher than estimated, especially if it comes from fuels or food.

It is time to be cautious and not make hasty decisions, which does not mean we have to be passive. Let us hope that diplomacy and negotiations prevail once again and that this invasion will be short-lived. From the other side of the world, for now, we can only be spectators.

Nathan Pincheira 

Chief Economist at Fynsa